Which Retirement Plan Is Right For Your Business?

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Offering a retirement plan to your employees can provide them with a substantial savings opportunity. It also can be a significant tax savings strategy for your business and a way to create a robust benefits package for attracting and retaining skilled talent.

But it can be tough to choose the right plan. Where do you start? Which plan is best for you, your business, and your employees?

Here’s an overview of five common retirement plans and how they compare:

Traditional 401(k) | Safe Harbor 401(k) | 403(b) | SEP IRA | Simple IRA

 

1. Traditional 401(k)

Highlight of this plan: It allows employees to make greater salary deferral contributions compared to other plans.

Eligible employers: Any employer with one or more employees (including self-employed) can offer a traditional 401(k) plan.

Filing requirements: If you offer a traditional 401(k), you’re required to annually file Form 5500 and provide a summary report to participants.

Employer contributions: Employers can make contributions on behalf of all participants, make contributions based on employees’ elective deferrals, or both. In 2020, they may contribute up to $57,000 or 100% of each employee’s compensation – whichever is less.

Employee contributions: Employees can choose to make pretax deferrals through payroll deductions. Employees can contribute up to $19,500 in 2020.

Eligibility requirements: Employers must offer this plan to all employees who are at least 21 years old and worked at least 1,000 hours in a previous year.

Vesting: Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.

Additional plans allowed: Yes, you may provide other retirement plans in addition to a traditional 401(k) plan.

Tax advantages: Employer contributions are deductible on the employer’s federal income tax return. Pretax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.

*Note: ADP/ACP discrimination testing is required.

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2. Safe Harbor 401(k)

Highlight of this plan: It doesn’t require ADP/ACP discrimination testing.

Eligible employers: Any employer with one or more employees (including self-employed) can offer a safe harbor 401(k) plan.

Filing requirements: Annually file Form 5500 and provide a summary report to participants.

Employer contributions: Employers must contribute either (1) 3% of all eligible participants’ compensation or (2) match 100% of employee deferrals up to 3% of their compensation plus match 50% of employee deferrals up to 3-5% of their compensation. In 2020, total employer contributions may not exceed $57,000 or 100% of each employee’s compensation – whichever is less.

Employee contributions: Employees can elect to make pretax deferrals through payroll deductions. Employees can contribute up to $19,500 in 2020.

Eligibility requirements: You must offer a safe harbor 401(k) to all employees who are at least 21 years old and who completed at least one year of service for the employer.

Vesting: Employee salary deferrals and required employer contributions are immediately 100% vested. Any additional employer contributions may vest over time according to plan terms.

Additional plans allowed: Yes.

Tax advantages: Employer contributions are deductible on the employer’s federal income tax return. Pretax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.

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3. 403(b)

Highlight of this plan: There’s no discrimination testing on employee salary deferral contributions.

Eligible employers: Public schools, colleges or universities, churches, and certain tax-exempt nonprofit organizations can offer 403(b) plans.

Filing requirements: You must annually file Form 5500 and provide a summary report to participants.

Employer contributions: Employers can make contributions on behalf of all participants, make contributions based on employees’ elective deferrals, or do both. In 2020, employers can contribute up to $57,000 or 100% of each employee’s compensation – whichever is less.

Employee contributions: Employees can elect to make pretax deferrals through payroll deductions. Employees can contribute up to $19,500 in 2020.

Eligibility requirements: 403(b) plans must be offered to all employees working 20 hours or more per week. Employers can require employees to satisfy certain age and service requirements to be eligible for employer contributions.

Vesting: Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.

Additional plans allowed: Yes – employers can offer another 401(a) or 457 qualified plan.

Tax advantages: Pretax elective deferrals and investment gains aren’t taxed. They enjoy tax deferral until distribution.

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4. SEP IRA

Highlight of this plan: There are no startup or operating costs.

Eligible employers: Any employer with one or more employees (including self-employed) can offer a SEP IRA.

Filing requirements: There are no filing requirements for SEP IRAs.

Employer contributions: In 2020, employers can contribute up to 25% of each employee’s compensation or $57,000 per employee – whichever is less. As the employer, you must contribute equally to all eligible employees.

Employee contributions: None, employees can’t contribute to the plan.

Eligibility requirements: Employers must offer SEP IRA plans to all employees who are at least 21 years old, employed for three of the last five years, and earned at least $600 for 2020.

Additional plans allowed: Yes, but if you used Form 5305-SEP to establish this plan, you can only offer another SEP.

Tax advantages: Employer contributions are deductible on the employer’s federal income tax return. The maximum deduction is the amount the employer contributed or 25% of its employees’ wages, whichever is less. Contributions aren’t taxed and enjoy tax deferral until distribution.

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5. Simple IRA

Highlight of this plan: Compared to other retirement plans, there’s minimal administrative paperwork and low operating and startup costs.

Eligible employers: You may offer this plan if you have one or more employees, and if you’re self-employed.

Filing requirements: There are no filing requirements for Simple IRAs.

Employer contributions: You’re required to match employee contributions 100% for the first 3% of compensation. Or, you must contribute 2% of each eligible employee’s compensation.

Employee contributions: Employees can elect to make pretax deferrals through payroll deductions. Employees can contribute up to $13,500 in 2020.

Eligibility requirements: Employers must offer Simple IRAs to all employees who have earned at least $5,000 in any prior two years, and who are reasonably expected to earn at least $5,000 in the current year.

Vesting: All employer and employee contributions are immediately 100% vested.

Additional plans allowed: No.

Tax advantages: All employer contributions are deductible on the employer’s federal income tax return. Pretax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.

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Once you choose a plan, what’s next?

Contact a tax professional or financial institution that’s familiar with retirement plans to discuss plan options and features in more detail.

Then, select a plan administrator. You can handle this internally or outsource it to a third party. A plan administrator can help with plan design and plan comparisons, perform any required compliance testing, track ineligible employees, and more!

Lastly, make sure the appropriate parties (human resources, finance/accounting, payroll) know the plan, its amendments, how to make any necessary salary deferrals, etc. Your company is ultimately responsible for complying with legal requirements, not your plan sponsor or administrator.

Originally published 7/19/2017. Updated 2/12/2020.

 

Have questions about which retirement plan is best for your business? Let’s talk!